Guangzhou is transforming into an advanced manufacturing hub powered by cutting-edge technology, all of which is placing greater demands on legal services. Avery chen reports

THE SOUTHERN CITY OF GUANGZHOU has played an important role in China’s history as a nexus between East and West. Located on the northern edge of the Pearl River Delta, the city was a major terminus of the maritime Silk Road in years past. Today, it is building a global transportation and commerce hub as the railway junction of southern China and blessed with one of the largest ports in the world.

With a population of 18.7 million, and covering an area of about 7,434 square kilometres, Guangzhou is the capital of China’s richest province, Guangdong, enjoying an advantage thanks to borders with Hong Kong and Macau. The city’s latest rise has been supported by a surge in modern industries such as advanced automobiles, electronics and petrochemicals.

Competition heats up

In 2020, Guangzhou was ranked the fourth-biggest Chinese city by GDP, which grew 2.7% year-on-year to RMB2.5 trillion (USD390.7 billion). However, Guangzhou is still behind China’s other three top-tier cities, partly because the city had not develop high-tech and modern service industries sufficiently. Its manufacturing industry had also failed to keep up with the rapid pace of digital transformation

Guangzhou and Shanghai were the two major treaty ports of modern Chinese history, and became trade centres in eastern and southern China. But the latter has grown as a global financial hub and outdistanced Guangzhou. Shenzhen, home to tech giants such as Tencent and Huawei Technologies, overtook Guangzhou as the biggest economy in southern China a decade ago, and has become the country’s second-largest financial market.

Guangzhou’s transition is, however, underway. According to the city’s 14th Five-Year Plan, which was released in March, the local government has set a GDP target of RMB3.5 trillion by 2025, with an annual growth rate of 6%. The city plans to spend RMB2.6 trillion in the next five years to support 10 key areas covering technology innovation, modern industry, smart city, transportation, urban renewal, environmental protection, etc.

Jeffrey Quan, a senior partner at ETR Law Firm in Guangzhou, says the five-year plan has highlighted some promising industries. “They are automotive supply chain, biomedicine, artificial intelligence, internet content providers, logistics and urban renewal,” he says.

Against this backdrop, the Guangzhou legal market is being transformed. Law firms are expanding their businesses from traditional litigation practices into non-litigation legal work including intellectual property, outbound investment, capital markets, property, reformation of state-owned enterprises, mergers and restructuring, onshore and offshore listings, information technology, etc.

Guangzhou law firms generated RMB8.3 billion in revenue in 2020, rising 8.5% year-on-year, according to data from the Guangzhou Lawyers Association. From 2016 to 2019, the number of lawyers in Guangzhou surged by 46.3% to 15,880, while the number of law firms rose by 27.5% to 770, according to the association.

The expansion continued despite headwinds from the covid-19 pandemic. By the end of 2020, Guangzhou had 17,956 lawyers, rising 13.1% year-on-year, while law firms grew by 5.7% to 814, the data show.

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“However, the majority of lawyers are focusing on low and middle-end legal services,” says Sam Wong, senior partner and director of Wang Jing & GH Law Firm, and chair of the Guangzhou Lawyers Association. “[Guangzhou] is still facing a scarcity of talent for high-end areas such as foreign-related legal services.

“The legal market competition in Guangzhou will keep rising in the next five years,” predicts Wong. “More and more law firms are scaling up businesses due to rising operation costs. As clients increase demand for legal services, law firms are putting up more money to improve the work environment, software and hardware, recruiting more administration and IT staff.”

The number of law firms with more than 100 lawyers rose by eight year-on-year, to 28 by the end of 2020, adds Wong.

吴清发__Wu_Qingfa__Zhong_Lun-LPrice competition in the legal market is heating up after large Beijing-based law firms opened offices in the city, undercutting small rivals, says Kent Woo, a partner at Zhong Lun in Guangzhou. “The growing number of difficult and complex bulk deals will give top-tier firms like us opportunities such as restructuring of large private enterprises and local government major investment projects.”

 

With large law firms that are headquartered in Shanghai or Beijing entering the legal market, small players without expertise are being phased out, says James Chen, the managing partner of Guangzhou-based Zhuoxin Law Firm.

But specialist law firms are facing other challenges. Established in the 1990s, Guangzhou-based Wang Jing & Co Law Firm has been focusing on shipping and marine insurance industries, which makes them highly competitive in their market, with a loyal customer base.

However, “the business is highly reliant on a single industry with low-risk resistance ability,” says John Wang, the firm’s executive managing partner. “That also causes more difficulties for transformation and attracting more new customers,” he says.

Meanwhile, grass-roots people’s courts are having to handle cases with higher values, meaning the commercial cases will become more local, says Alvin Xiao, a partner at Fangda Partners.

 

The Supreme People’s Court issued a judicial explanation for amending the jurisdictions of the intermediate people’s courts in September. Under the new rules, grass-roots people’s courts have jurisdiction over cases that are: not related to foreign elements; with subject matter of action being not higher than RMB500 million; and where the place of domicile of one party shall be in the provinces.

肖潇__Alvin_Xiao__Fangda-L“We can expect that the grass-roots people’s courts will handle the first trial of a significant number of complex and important commercial disputes, which were usually done by higher people’s courts or intermediate people’s courts,” says Xiao. The law firm’s Guangzhou office is representing cases with values from tens of millions to billions in renminbi, he adds.

Engine of the GBA

Despite the competition, China’s ambitious Guangdong-Hong Kong-Macau Greater Bay Area (GBA) regional development scheme has been unleashing opportunities for Guangzhou, lawyers say. The central government is developing a megalopolis in the Pearl River Delta region, with a goal of turning the area into a global technology innovation centre by 2035.

The GBA comprises nine cities in Guangdong province including Guangzhou, Shenzhen and Zhuhai, as well as Hong Kong and Macau SARs. The total area had a population of more than 86 million and a GDP of USD1.67 trillion in 2020.

“So far, Guangzhou’s policy implementation with respect to the GBA is mainly focusing on job creation and entrepreneurship, financing and taxation, as well as technology innovation,” says Wang Lixin, a partner at King & Wood Mallesons (KWM) in the city.

Under the GBA development plan, to meet the demand for high-end talent, people from outside the mainland can enjoy a financial subsidy, which reduces individual income tax to no higher than 15%. Meanwhile, eligible Hong Kong and Macau professionals such as lawyers, architects, structural engineers, doctors etc., can easily acquire the corresponding professional qualification to practice in mainland cities, according to the GBA development blueprint.

Hong Kong and Macau lawyers especially are eligible to practice in nine GBA cities after passing the GBA legal professional examination. A total of 655 Hong Kong lawyers took the first legal exam in July. The Guangdong Department of Justice also lowered the requirement for law firms in the two SARs to set up partnership associations. As of September, there are 26 partnership associations in Guangdong province, including three in Guangzhou.

“Hong Kong and Macau lawyers would be allowed to practice in GBA cities, and the companies will receive more professional legal services, improving their compliance,” says Sam Wong, of Wang Jing & GH.

In terms of technology and innovation, the city issued guidelines for innovation-driven preferential policies in September, with a detailed explanation of the policy implementation process of tax incentive breaks, subsidies and rewards for high-tech companies and biomedicine sectors, as well as recognition and registration of technology contracts, adds Wang Lixin of KWM.

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Wang Lixin points out that the establishment of Guangzhou Futures Exchange is worthy of attention, as part of local government efforts to promote green finance in the GBA. “The exchange is expected to drive the development of the futures market in the region,” he adds.

In terms of the opening up of the financial industry, a Guangzhou Municipal Local Financial Supervision and Administration Bureau plan to implement financial support for the GBA outlines 12 measures covering banking, securities and insurance industries, encouraging offshore institutions to set up subsidiaries or joint ventures in the region. Guangzhou also encourages stateowned enterprises (SOEs) to develop real estate investment trusts (REITs) with support from institutional investors and national pension funds.

Xie Lingli, a senior partner at Dentons in the city, says the recent rollout of the GBA Wealth Management Connect scheme will be the next growth driver for the local wealth management market. The cross-boundary scheme enables eligible Hong Kong and Macau residents to invest in mainland wealth management products from banks in the GBA. Mainland investors are also allowed to buy offshore products through the programme.

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Xie says the improving economic integration of the region is also contributing to the burgeoning family office market. “The GBA is home to many family companies, with rising demand for family wealth management legal services;” she says. “At the same time, the strong family office ecosystem in the GBA is more conducive to the development, exploration and innovation of the market.”

Meanwhile, China has built a pilot free trade zone in Nansha district of Guangzhou, which has introduced a series of measures to attract Hong Kong and Macau companies. That includes financial subsidies, low-interest loans for companies in the technological innovation, advanced manufacturing and construction, shipping, logistics and financial services sectors.

In 2019, the Nansha District People’s Court of Guangzhou set up an intellectual property dispute resolution centre, becoming the first in China’s free-trade zones, and reducing the cost of rights protection for companies.

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Zhang Ping, a partner and member of the management committee at JunHe in the city, says Guangzhou is enjoying a series of preferential policies under the GBA development plan, despite being less generous than the innovative policies of other new free trade zones including Hainan Island, Zhuhai’s Hengqin Island and Shenzhen’s Qianhai Shekou. “But Guangzhou has irreplaceable attractions thanks to its unique business environment, supporting industries, living space and culture,” he says.

High-tech drive

Science and technology innovation is at the heart of Guangzhou’s development plan amid China’s tech self-reliance push. In August, the city announced 10 sweetened terms to support “technologically advanced” small and medium enterprises (SMEs) covering financing, research and development, talent and industrial parks, etc.

The city has introduced favourable policies for technologically advanced industries in the past year, especially biomedicine, 5G, semiconductor and chip sectors, says Aron Hu, a partner at Zhong Lun Law Firm. Of particular note are policies to lure talent in Hong Kong and Macau, including subsidised housing and tax incentives, he says.

Global pharmaceutical giants such as British-Swedish AstraZeneca, Swiss-based Lonza and Beijing-based BeiGene are building new manufacturing facilities and research centres in the city, pushing the development of a biopharma innovation ecosystem, according to Woo at Zhong Lun.

Capital markets are also benefitting from the innovation and technology industry boom. With the opening of the proposed Beijing Stock Exchange and registration-based IPO reforms, the financing activities of technologically advanced companies have gained momentums, says Zhang Baisha, a partner also at Zhong Lun, adding that the new energy industry especially has come under the spotlight.

As the world’s largest greenhouse gas emitter, China launched its long-awaited national emissions trading scheme in July, which allows companies to trade emission permits of carbon dioxide or other greenhouse gases, providing incentives to cut pollution.

Meanwhile, Guangzhou Futures Exchange officially launched at the beginning of this year, focusing on carbon futures products as part of the effort to achieve peak emissions before 2030 and carbon neutrality by 2060.

“As the major supplier of carbon emission allowances, the new energy sector is expected to play a crucial role in China’s carbon market in the future,” says Zhang Baisha. “Capital markets are closely watching how the carbon trading market will affect the industry, especially the new energy vehicle sector.”

Guangzhou is the third-largest automotive manufacturing base in China and home to Guangzhou Automobile Group, the fifth-largest Chinese carmaker by 2020 revenue. That gives it a strong basis to develop the new energy vehicle industry, with a focus on electric vehicles and hydrogen-powered cars.

The city issued the Guangzhou Hydrogen Industry Development Plan (2019-2030) last year, with the aim of establishing a hydrogen energy industrial chain and becoming a hydrogen power hub in southern China, with an output target of more than RMB200 billion by 2030.

To advance the hydrogen fuel cell vehicle industry, the Guangzhou government signed an investment contract with South Korea-based Hyundai Motor Group in January to build its first overseas fuel cell production plant in the city. Another highlight is internet-connected vehicles and AI-assisted driving, which brings more opportunities for the legal market, according to James Chen, of Zhuoxin. In addition to developing new industries, local government is pushing urban renewal projects, through SOEs and local government debt, as part of transformation efforts to achieve the GBA’s five-year plan, according to Aron Hu, of Zhong Lun. Guangzhou has approved more than 100 urban renewal projects with total investment of more than RMB1 trillion, he says.

Maritime and port

Guangzhou has a highly developed port and shipping industry, with the port being among the top five busiest ports in the world, with a cargo handling capacity of 636 million tonnes. The industry was hard hit by the covid-19 pandemic last year, while pent-up demand amid the reopening of the global economy has brought new legal challenges.

Container ports have seen worsening congestion and declining capacity due to the entry restrictions and quarantine measures abroad. However, the dry bulk shipping and freight markets are benefitting from surging shipping costs, as a backlog is less likely to ease in the short term, says Huang Hui, the managing partner and director of Guangzhou-based Huang & Huang Co Law Firm.

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“The pandemic has sent freight rates soaring to record highs, with container ship charter rates double the level of 16 years ago,” says Huang. “Because of that, more and more bulk carriers have moved into the container shipping industry. Major companies are seizing the opportunities to expand capacity by buying second-hand ships or converting bulk carriers to handle containers. But the trend has led to more legal challenges, such as contract disputes and security issues related to the converted vessels.”

John Wang, of Wang Jing & Co, points out that exporters are facing possible legal risks due to port congestion and surging shipping expenses. “Cargo owners may bar demurrage and detention charges if they fail to load goods on board in time,” he says. “They’re also at risk if shipping firms cancel voyages. Cargo owners may refuse to pay demurrage and detention fees, declaring force majeure.

“Amid the pandemic, container ports may charge higher storage fees, given mounting cargo congestion. Correspondingly, cargo owners and shippers may ask for price reductions due to force majeure,” says Wang. Meanwhile, there are increasing disputes related to crew changes, seafarers’ health and increasing labour costs.

For the longer term, the marine leisure tourism industry may take advantage of the post-covid recovery, which is one of the major priorities of Guangzhou’s 14th Five-Year Plan.

 

“Cruise companies in Guangzhou have a golden opportunity thanks to the pilot implementation of a 15-day visa-free policy for foreign tourists arriving on cruises,” says Huang.